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Is Pandora the Biggest Threat to CBS Radio?

CBS (
CBS
) primarily competes with other media conglomerates like Disney (
DIS
), Time Warner (
TWX
), Viacom (
VIA
) and News Corp (
NWS
) in the broadcasting and cable networks business. Like its
counterparts, CBS also relies significantly on advertising revenues
that are a function of both advertisement pricing and viewership.
Our price estimate for CBS' stock stands at
$19.72
, which is slightly ahead of the current market price.

Radio remains one of the company's larger profit drivers. CBS
radio operates 130 radio stations in the U.S. and offers its
audience several formats through the combination of on-air, online
and new media platforms. CBS radio, in conjunction with CBS-owned
TV stations, constitutes about 27% of the company's stock value, by
our estimates.

CBS radio has lost market share over the past few years,
primarily due to divestment of some ratio stations as the company
focuses its efforts on larger markets. We estimate that the
company's
share of the radio market
declined from a little under 11% in 2005 to about 8% in 2009. With
a renewed focus on major markets and improvement in the advertising
sector, we estimate that CBS will be able to maintain stable market
share around 8% going forward.

However, increasing competition from satellite and internet
radio could shake CBS' position in the years ahead.

Pandora Advancing into Drive-Time Market

Pandora, an internet radio service, is now pushing into the
drive-time radio market. This market targets listeners during prime
commuting hours. As this remains one of the more popular times for
people to tune-in to local radio broadcasts, advertisers are
typically willing to pay a premium for airtime during these hours.
Traditionally, this market has been dominated by larger radio
services like CBS. But can the stalwarts withstand Pandora's
push?

Pandora has a critical edge on traditional radio players through
its advertising capabilities. According to Ford's digital marketing
manager, Pandora can use several metrics like age, gender or
musical taste of the user to increase the effectiveness of
advertising. In 2011, Ford (F) is expected to launch cars with
embedded software that will operate Pandora through voice controls.
Additionally Mercedes-Benz, owned by Daimler AG (ETR:DAI), is also
promoting Pandora's radio service in its vehicles.

Can CBS combat Pandora's momentum with its own internet radio
offering (Last.fm), or will Pandora's progress eat into CBS' market
share? If CBS' radio market share declines to 6% by the end of our
forecast period (vs. our 8% forecast) there could be roughly 5%
downside to our price estimate, pushing our number just under
market price.

To see the impact of radio market share on CBS' stock value,
drag the trend line in the modifiable chart above.

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